More Canadian consolidation: Loblaw buys SDM

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TORONTO — Loblaw has entered into a definitive agreement with Shoppers Drug Mart under which Loblaw will acquire Shoppers Drug Mart for C$12.4 billion in cash and stock.

"We are delighted to partner with Loblaw to leverage our combined strengths. For our shareholders, this transaction provides significant and immediate value, as well as the ability to benefit from future upside by virtue of their continued ownership of shares in the combined company. For our associate-owners and employees, who are a valued part of the equation, it provides the opportunity to pursue rewarding careers as we grow together. And for our customers, it provides more locations with an enhanced mix of products and offerings that contribute to the good health of Canadians,” stated Domenic Pilla, president and CEO of Shoppers Drug Mart.

Under the agreement, Loblaw will acquire all of the outstanding Shoppers Drug Mart common shares for C$33.18 in cash plus 0.5965 Loblaw common shares per each Shoppers Drug Mart common share, on a fully pro rated basis. Loblaw and Shoppers Drug Mart anticipate that the transaction will be completed within six to seven months.

Using the Loblaw closing common share price on July 12, 2013, this amounts to C$61.54 per Shoppers Drug Mart common share. This price represents a 29.4% premium to the 20-day VWAP of Shoppers Drug Mart common shares as of July 12, 2013.

"This transformational partnership changes the retail landscape in Canada. With scale and capability, we will be able to accelerate our momentum and strengthen our position in the increasingly competitive marketplace," stated Galen Weston, executive chairman of Loblaw. "This combination creates a compelling new blueprint for the future, positioning us to capitalize on important trends in society, from the emphasis on health, wellness and nutrition, to the imperatives of value and convenience."

"Our customer proposition is at the heart of this combination," added Vicente Trius, president of Loblaw. "Together, we will be able to significantly enhance the customer experience by offering even greater assortments, service, value and convenience while preserving the unique shopping experiences that make both companies leaders in their respective segments. We are extremely happy to welcome Shoppers Drug Mart and its talented people, including their entrepreneurial and trusted Associate-owners, who are well-known for their patient care and friendly customer service. We intend to preserve the great strengths of what the company has built by keeping Shoppers Drug Mart as a separate division of Loblaw, with its own dedicated management team led by Domenic Pilla.

On a pro forma basis, the combined company generated in excess of C$42 billion in revenue, C$3 billion in EBITDA, and C$1 billion in free cash flow in 2012, the companies stated. The transaction is expected to lead to double-digit accretion, adjusted for intangible amortization, in Loblaw earnings per share in the first year.

The combination is expected to yield annual cost synergies of C$300 million by year three, phased in evenly over the first three years following closing. These synergies are not dependent on any store closings, the companies stated.

The total consideration will consist of approximately 53.9% cash and 46.1% Loblaw common shares. Shoppers Drug Mart shareholders will have the ability to choose whether to receive C$61.54 in cash or 1.29417 Loblaw common shares plus C$0.01 for each Shoppers Drug Mart share held, subject to pro ration. The maximum amount of cash to be paid by Loblaw will be approximately C$6.7 billion and the maximum number of Loblaw common shares to be issued will be approximately 119.9 million, based on the fully diluted number of Shoppers Drug Mart shares outstanding. Shoppers Drug Mart shareholders, who will own approximately 29% of the combined company.

Loblaw will finance the cash element of the transaction with available cash resources and committed bank facilities fully underwritten by Merrill Lynch, Pierce, Fenner & Smith Inc., Bank of America, N.A., Canada Branch and Bank of America, N.A. These committed facilities consist of a C$3.5 billion term loan and a C$1.6 billion bridge loan that Loblaw plans to replace primarily through issuance of unsecured notes. The combined company's cash flow will allow for debt repayment and will ensure that Loblaw will have ample liquidity and maximum flexibility to support ongoing growth prospects, acquisitions and investments, the companies stated.

George Weston Limited, Loblaw's controlling shareholder, will buy an additional C$500 million in Loblaw shares to help finance the deal. Weston currently holds approximately 63% of Loblaw's common shares.